A bridging loan is very different from a regular property loan, in what way? this article explains the ins and outs of a bridging loan and their uses.

A bridging loan is a short term property backed finance. They are typically used to fund you for an agreed amount of time while permitting you to either find a longer-term finance solution or the sale of your asset.

Bridging loans are sometimes offered for between 6 to 36 months, with the loan and interest payments due at the end of the agreed loan term.

In contrast to alternative types of borrowing, the monthly interest is commonly rolled until the term ends or you exit, therefore you have no further payments during the loan term.

The application method is typically way less complicated than for regular loans or mortgages and of other borrowing methods and the loan process can be completed within a week or two.

Bridging loans are offered typically against real estate assets and the money is used for the following purpose typically:

  • Buying a property via auctions
  • Buying repossessed property
  • Building work such as conversions or refurbishments
  • Purchasing “below-market property”
  • Buying a property being sold quickly for cash

Bridging Loans Pros & Cons

Take into account bridging loans are a risky proposition if you don’t know what you are doing, it is wise to understand what you are using such a loan for and to think carefully before taking such a loan for your projects.

The Pros:

When money is needed fast, the process can be completed within 10 days.

No monthly fees so as such cash flow is available without worrying, although the asset will be under “charge”

Purchasing a property under market value and getting the loan according to its current market value.

Borrow money on assets that you would not be able to raise capital for from a regular loan, such as repossessed or worn down property.

The Cons

Bridging loans come with higher interest rates, although they are getting cheaper due to the competition within the industry, they are still much dearer than a regular mortgage for example.

The loans are very short so you have no room in making mistakes with your project or goal.

Things to consider before choosing a bridging loan option:

Take into consideration the costs involved, remember the high-interest rate and other charges that come with this type of loan. There may be hidden charges, its prudent to use a bridging loan calculator. Learn more here
Have a clear exit strategy before taking out a bridge loan.

Is your project viable? the asset could be at risk if you don’t pay the loan as agreed.

If for example, the exit strategy is to sell the property and make a profit, make sure you have time available to put the property on the market and find a buyer or you may have to sell it quickly if time is running and miss out on full profits.

If the exit strategy is to get a long term to refinance, make sure you will pass the application process or you could be stuck in a dilemma.

Getting the best deal, always check with a few lenders rather than a sole lender to get the best possible deal for your project.

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